Let the worry-warts fret about the risks of a plummeting U.S. dollar. At Al-jon Inc., a company in Ottumwa, Iowa, that makes heavy machines for the steel and solid waste industries, the descent of the U.S. currency has business humming.
A weaker dollar means that Al-jon's machines, which weigh as much as 90,000 pounds and cost hundreds of thousands of dollars each, can sell more cheaply in overseas markets. It also forces the company's main German competitor to increase prices on its machines in the U.S. market.
"It has made a staggering difference," said Kendig Kneen, Al-jon's owner and president. The dollar's 24 percent drop against the British pound since January 2002, from $1.40 per pound to $1.85 yesterday, has been a particular boon. In the British and Irish markets, where Al-jon concentrates much of its export effort, the 110-employee company saw its annual sales shrivel to two machines early in the decade when the dollar was strong; this year, it will sell 17 machines, Kneen said.
The benefits of a cheaper dollar for U.S. manufacturers are one major reason why the Bush administration has taken a relaxed attitude toward the slide in the U.S. currency, which has fallen 20 percent since early 2002 against several currencies, including a 3.4 percent drop in the past month. Against the euro, the dollar hit a record low for the second consecutive day before rebounding.
Although American tourists on overseas vacations may have to pay more for their hotel rooms and souvenirs, and price increases may be in store for imported goods, "what we're seeing at the moment would . . . seem to be just what the doctor ordered," economists at J.P. Morgan Chase told clients yesterday in a report. "After five years of relative misery, U.S. manufacturers are beginning to enjoy significant, sustained market share gains in global markets." Exports of goods rose to a record $70.2 billion in September, 15 percent higher than a year earlier.
The dollar's steady decline is nevertheless worrying to many economists, who view it as a harbinger of a sell-off of U.S. bonds and stocks by overseas investors.
"The market signals have already started to come," said Nouriel Roubini, a New York University economist who is an expert in the crises that have afflicted emerging markets in Latin America, Asia and Eastern Europe. Because of the gaping U.S. trade and budget deficits, Roubini wrote on his Web site last week, chances are rising fast for a crash in the dollar that would translate into "financial train wrecks for the U.S. economy in a matter of a couple of years."
With a colleague, Brad Setser, Roubini recently published a study of the trade imbalance that has gotten a respectful reading in high administration circles. Like other pessimists on the subject, Roubini and Setser focus mainly on the enormous amount of debt that the United States has incurred with foreigners in recent years. Because the U.S. government spends hundreds of billions of dollars more each year than it collects in taxes, and because Americans buy hundreds of billions of dollars more each year in imports than they sell in exports, the country has effectively borrowed much of the difference from abroad, with foreigners amassing huge holdings of U.S. Treasury bonds and other securities.
As a result, the broadest measure of the amount the United States owes the rest of the world has shot up from $360 billion in 1997 to an estimated $3.3 trillion this year -- a figure that, as a multiple of U.S. exports, is "in shooting range of [the comparable figures for] troubled Latin economies like Brazil and Argentina," the study says. It adds that "as students of recent emerging market crises know, the market can swing . . . quite quickly" from buying vast quantities of a country's bonds to unloading them in a panic.
Similar fears were expressed at a recent seminar by John Williamson, a scholar at the Institute for International Economics, who noted that, at around $650 billion, the broadest measure of the U.S. trade deficit is already "larger than any large country has had in the lifetime of any of us." And it appears headed much higher -- from about 5.7 percent of gross domestic product this year to 12 percent of GDP by 2010, by some estimates. Under that scenario foreigners would have to lend Americans much greater sums than they do now to cover the cost of imports, Williamson said, so "it is very difficult to believe that the danger of a crisis doesn't increase as U.S. indebtedness increases."
The Bush administration regards the risks of such nightmares as remote, as John B. Taylor, the Treasury undersecretary for international affairs, made clear at the same seminar. The administration fully intends to reduce U.S. dependence on foreign funds, Taylor said, including curbing the federal deficit. Washington is also pressing China to allow its currency to float upward, which by making imports from China more expensive would help reduce the U.S. trade gap.
During the time required for those measures to take effect, the United States should have no problem attracting money from abroad because "America remains a very attractive place for investment," Taylor said. Moreover, he dismissed as unimportant reports that foreign investors have recently stopped putting money into the United States. Even though government figures show that foreign money dried up in the second quarter of 2004, the U.S. economy experienced no difficulty, because U.S. investors filled the gap by keeping some of their money at home instead of investing abroad.
Critics of the administration's approach acknowledge that the dollar's fall may be relatively trouble-free, shrinking the trade deficit without throwing markets into chaos. Kenneth Rogoff, the former chief economist of the International Monetary Fund, said, "In the 1980s, the dollar fell by something like 40 percent, and it wasn't so bad for anybody except Japan," which struggled to maintain its export-fueled economy as the value of the yen skyrocketed.
"On the other hand, we also saw a dramatic dollar move in the '70s" that undermined confidence in U.S. assets and fueled inflation by raising the cost of imports, Rogoff said. "The [trade deficit] is not sustainable; it's going to reverse, and the only question is how painful it will be when it does."
On this much, both the optimists and the doom-and-gloom set are generally agreed: The dollar is headed south. Fans of French wine or German cars might be disappointed. But it is welcome news for Clyde G. Nixon, the chairman of Sun Hydraulics Corp., and the 530 people Sun employs in Sarasota, Fla., making valves used in all kinds of equipment. The company's $80 million in sales in 2000 fell 20 percent when the dollar was strong, but this year sales are up more than 30 percent, exceeding $90 million.
Asked Wednesday about his reaction to the dollar hitting an all-time low against the euro, Nixon replied, "It won't do us any harm. How's that for understatement?"